Wednesday, December 4, 2013

Bubbles, bubbles everywhere

A couple of weeks ago we looked
at a recent cover of Barron’s, which featured a picture of a
giant bubble. The cover story asked the rhetorical question of
whether there was a bubble in the financial market.

Indeed, the bubble vigilantes are
out in full force which suggests a full-fledged financial market bubble hasn’t
fully developed. On the front cover of Nov. 18 Barron’s,
the editors ask the question of whether or not equities are in a
bubble. Their answer: “Yes, in some tech names and new issues” and
“No, in most other shares.” The Barron’s cover very
much underscores the heightened sensitivity to developing bubbles, which in
turn keeps investor sentiment from becoming too ebullient before the final
melt-up stage of the bull market.

With each passing week we see
that a growing number of pundits and analysts remain on high alert over the
development of a potential asset price bubble. Bubble predictions
have mainly been focused on stocks and real estate. To just one
example, The Washington Post blog published this headline on
Monday: “These 17 countries may have housing bubbles. If they pop,
God help us all.”

Behind this gloomy prediction is
none other than Nouriel Roubini, the ultra-bearish economist who correctly
forecast the global financial crisis six years ago. Roubini doesn’t
mention the U.S. in his list of bubble-prone countries but he believes that the
large list of countries with frothy real estate markets could contribute to a
global economic collapse on the order of the 2008 crash.

According to Roubini, most major countries
(excluding the U.S., southern Europe, Russia and Africa) are experiencing
something akin to a real estate bubble due to cheap credit. Should
the bubbles begin to burst in the coming months the consequences to the global
economy could be fatal.

Yet another high-profile
prognosticator to engage in bubble-speak lately is Robert Shiller, the Nobel
Prize winning economist. Shiller has made countless forecasts in the
financial press in recent years with mixed results. His most vocal
predictions are those dealing with a repetition of the 2008 financial market
drama, and the popular press is all-too happy to publicize them.

Shiller was at it again this
weekend, warning of a U.S. stock market bubble. He told Der
Spiegel, “I am not yet sounding the alarm. But
in many countries stock exchanges are at a high level and prices have risen
sharply in some property markets. That could end
badly.” He added that he was most worried about the boom in equity
prices because he believes that the U.S. economy is “still weak and
vulnerable.” He described the financial and technology sectors as
“overvalued.”

The growing number of
bubble-related headlines was enough to warrant the conclusion I wrote in the
Nov. 18 issue of Momentum
Strategies Report: “The Barron’s cover very
much underscores the heightened sensitivity to developing bubbles, which in
turn keeps investor sentiment from becoming too ebullient before the final
melt-up stage of the bull market.” In other words, as long as the
financial press remains on “bubble alert” the chances of a massive market
bubble are diminished.

There may well be something to
fear of Roubini’s global real estate bubble warning in 2014. For
that matter, perhaps even Shiller’s prophecy for U.S. equities will be
fulfilled next year. For the foreseeable future, however, the
still-high level of investor caution and “bubble-phobia” should be enough to
prevent the collapse that the Cassandras fear. Only when investors’ guard is
relaxed do we need to worry about the detrimental effects of collapsing
bubbles. For now there appears to be enough concern to prevent the
type of scenario the bubble-mongers are trying to conjure up, at least in the
near term.

Note: By popular request I’ve
provided an explanation of the weekly Kress cycles in my latest book, Kress Cycles, which
explains the weekly Kress cycles in depth. It's now available.